Sunday, 3 May 2015

The Great Escape

I'm just back from one of my regular business trips to China. These trips always provide a refreshing sense of perspective on the political and economic debates we have in the UK.

Based on my experiences on this trip I'm keen to write about democracy and state control of media. I have a draft blog written about how even the structure of the Chinese language impacts the way we should think about our business and social interactions with Chinese business partners, colleagues and friends.

But these blog posts will have to wait, because today I feel compelled to focus on one topic: economic growth.

I return home to read of a predicted Scottish landslide for the SNP at next week's General election. If this happens (and it seems clear it will) this will be the greatest escape since ... well most of them didn't escape in The Great Escape but I'm too jet-lagged to think of an alternative analogy. Let's just say it will be a great escape.

Since the referendum the publication of two sets of Scottish national accounts ("GERS") and the focus on the economic realities of Full Fiscal Autonomy (FFA) should really have nailed the SNP's economic nonsense once and for all.

I make no apologies for repeating this graph of the Scottish Government's own GERS data because it powerfully illustrates this point.

Without oil we consistently run a long-term onshore deficit gap to the rest of the UK of about £9bn. We are currently shielded from that by pooling and sharing with the rest of the UK - Scotland does not "suffer" this deficit gap currently.

As an aside: some people react to this graph and say it's "just a snapshot". Below I have removed the most recent two years' data and highlighted the "snapshot" 5 years that were used for the Independence White paper. The Yes campaign used this period to justify their "we're independently fiscally as strong as rUK" rhetoric, long after more recent data became available.

Now *that's* what I would call taking a misleading snapshot. To point out - as many of us did - that the figures actually showed how exposed Scotland's economy was to volatile oil income was dismissed as "talking Scotland down" or "suggesting oil is not an asset". Infuriating.
So might oil come to our rescue? This seems highly unlikely - not because the oil price will never recover but because their is an underlying decline in North Sea profitability due to rising extraction costs. It's profit that get's taxed - so the North Sea tax yield has been deteriorating independently of the oil price decline. Few people seem to understand this graph but I'll repeat it anyway - the black line shows the actual historic amount of North Sea tax generated for every $ of oil price. The line declining shows the declining tax yield. Contrast that with the red line showing the oil price and you should see my point.

It's quite possible therefore that North Sea oil revenues are in terminal decline. At the very least we are seeing a stark illustration of the fact that they cannot be relied upon as the basis for an independent Scottish economy. North Sea oil really does have to be considered as "just a bonus".

Faced with this harsh reality the SNP can no longer hope to deny the scale of the onshore deficit gap between us and the rest of the UK.

So back to this onshore (or "underlying") deficit gap. It's self evident that this gap is caused far more by higher spending on public services than by lower revenue generation. Closing the gap by cutting public spending is the obvious easy fix (about 14% cuts across the board is all it would take) but hardly a vote winner so certainly not something the SNP would admit to contemplating. Raising tax rates wouldn't be a popular option either so the SNP are left grasping at the remaining straw left to them - they'll deliver "unprecedented" economic growth.

When asked quite how this will be delivered they reel off a series of tax cuts - cutting APD, reducing VAT on tourism and unspecified "targeted tax cuts to SME's". In the short-term at least this would of course reduce the tax take and exacerbate the deficit problem but this is simply glossed over. We're told we need to take a longer term view, look at the big picture, show some ambition and believe we'll grow our way out of this.

Let's put aside for a moment that there is little to suggest that the raft of tax cuts proposed would drive enough economic growth to offset their revenue reducing impact. Let's ignore the fact that if this strategy would work it would be as appropriate to the UK as a whole as it is to Scotland. Let's run with the theory that the main Westminster parties are simply too stupid to realise that this political elixir is available to them.

Instead let's just ask three questions.

How much economic growth would we need to close this deficit gap?

How long would it take take to achieve that growth?

What would we do in the meantime?

The "how much" question is easy to answer - we'd need to grow our onshore tax revenues by 16%over and above the rest of the UK to close the gap. The SNP say they would cut taxes to achieve this growth which means our tax take as a percentage of GDP would decline. This means of course that we would need to see even higher than 16% relative GDP growth.

OK so what about how long? I decided to search the Independence White Paper for any indication of the growth levels that the SNP were aspiring to back then. After much trawling (head-shaking and teeth-grinding) all I could find was this gem on page 108:

If Scotland moved from the rates of growth it has experienced in the past to instead match the levels of growth of small European countries, the benefits for people in Scotland in terms of prosperity and employment would be significant. As an illustration, had growth in Scotland matched these other independent nations between 1977 and 2007, GDP per head would now be 3.8 per cent higher

So the illustration they chose to demonstrate the sort of difference we could expect to see from independence was 3.8% higher GDP growth over a 30 year period.At that rate of relative economic growth it would take us about 120 years to close the gap.

I think it's reasonable to conclude that the SNP's claims that growth alone will address the onshore deficit gap fails this "sanity check" rather spectacularly.

So as we come to the third question: what would we do in the meantime? There are limits to how far we can go with debt - I think I might have once heard some Nationalists suggesting the amount of debt we have now is too much - so the answer is extremely simple. We'd have to dramatically reduce public spending.

The SNP campaign to scrap Trident but not to dramatically reduce the defence budget, they talk of "unfair cost allocations" without actually pointing to any material examples - and in fact they talk of increasing public spending (alongside reducing business taxes).

The SNP position is transparently, demonstrably, economically nonsensical - and yet a large proportion of the Scottish electorate appear to accept it.

The SNP know what they are doing of course. Tell big simple lies and keep repeating them, offer the people a bogey-man to blame, sell the hope and ignore the reality. It is cynical, calculated political deceit.

What makes it worse is that the people who will suffer most if the SNP succeed are those to whom their messages appeal most; the worst off in our society.

It appears the scale of the SNP's deception may only be realised by the Scottish people when it's too late to do anything about it. Of course by then the SNP aim to have broken up the BBC and to have their own state-controlled media in place. Having just emerged from a week behind the Great Firewall of China, I have some perspective on the potential for politicians to exert influence over the masses through media control - but that is a topic for another day.

11 comments:

What makes it worse is that the people who will suffer most if the SNP succeed are those to whom their messages appeal most; the worst off in our society."

That's the bit that always gets me. SNP policy has so far, except the bedroom tax funding, been entirely to win the middle-class votes, and their car for independence or FFA is going to hit the less well-off the hardest. But try saying that to do many supporters who think the SNP and an independent Scotland are about a fairer society than the last 5 under the coalition.

Out of curiosity, do you have a clear idea how Scottish government finances (described above) compare against other parts of the UK? Are there equivalent geographic areas that are financially similar, with above average expenditure, and below average income?

My gut instinct is that there are, with much of the UK geographic areas being funded by London and the South East. I'd expect London to have below average expenditure (very high population density) and above average income (company taxation?).

Great bit of analysis again, Kevin - "At that rate of relative economic growth it would take us about 120 years to close the gap." Ha, ha!

However, the part which most interested me was this:

“The SNP know what they are doing of course. Tell big simple lies and keep repeating them, offer the people a bogey-man to blame, sell the hope and ignore the reality. It is cynical, calculated political deceit.”

This strategy is spookily similar to the doctrines on propaganda and manipulation proposed by the most famous nationalist of them all, thus:

“The receptive powers of the masses are very restricted, and their understanding is feeble. On the other hand, they quickly forget. Such being the case, all effective propaganda must be confined to a few bare essentials and those must be expressed as far as possible in stereotyped formulas. These slogans must be persistently repeated until the very last individual has come to grasp the idea that has been put forward.”

“...the broad masses of a nation are always more easily corrupted in the deeper strata of their emotional nature than consciously or voluntarily, and thus in the primitive simplicity of their minds they more readily fall victims to the big lie than the small lie, since they themselves often tell small lies in little matters but would be ashamed to resort to large-scale falsehoods. It would never come into their heads to fabricate colossal untruths, and they would not believe that others could have the impudence to distort the truth so infamously. Even though the facts which prove this to be so may be brought clearly to their minds, they will doubt and waver and will continue to think that there may be some other explanation. For the grossly impudent lie always leaves traces behind it, even after it has been nailed down, a fact that is known to all expert liars in the world and to all people who conspire together in the art of lying. These people know only too well how to use falsehood for the basest of purposes.”

Don't know about you, but I find the similarities as creepy as anything!

A lot of these SNP "growth" plans are just to lower specific taxes in order to win business away from rUK. So the drop in APD will benefit Glasgow & Edinburgh to the detriment of Manchester & Newcastle. And the drop in VAT for tourism will make Edinburgh & the Highlands cheaper than Bath and the Lake District.

However this assumes that rUK doesn't just retaliate with tax cuts of its own. And then we're into a beggar my neighbour competition between two countries, of which one is ten times larger and richer. The result of which will be inevitable.

A lot of these SNP "growth" plans are just to lower specific taxes in order to win business away from rUK. So the drop in APD will benefit Glasgow & Edinburgh to the detriment of Manchester & Newcastle. And the drop in VAT for tourism will make Edinburgh & the Highlands cheaper than Bath and the Lake District.

However this assumes that rUK doesn't just retaliate with tax cuts of its own. And then we're into a beggar my neighbour competition between two countries, of which one is ten times larger and richer. The result of which will be inevitable.

"What makes it worse is that the people who will suffer most if the SNP succeed are those to whom their messages appeal most; the worst off in our society."

The odd thing about FFA is that it's pretty much as good a way as you could imagine of destroying the SNP's electoral standing in Scotland (and with it the appeal of independence). They'd immediately be the ones responsible for the cuts that would follow.

But while the SNP being wiped out appeals to me, there would be nothing to celebrate in that scenario - the poor would suffer and our public services would decline. Being able to say "I told you so" wouldn't be much consolation.